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Investment Overview for Halliburton Company (NYSE:HAL)

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Below are the key drivers of Halliburton's value that present opportunities for upside or downside to the current ${trefisprice}:

North America

North America EBITDA Margins: Halliburton's EBITDA margins for the North American region have varied considerably, rising from around 26.5% in 2010 to around
32.1% in 2011 on the back of growth in demand for pressure pumping services. However, an oversupply of pressure pumping equipment and weak natural gas prices have meant that margins have remained at levels of under 25% between 20012 and 2014. Halliburton's North American activity is largely geared towards unconventional hydrocarbons and services such as hydraulic fracturing which are facing some pricing pressures. However, the company has been focusing on improving operational efficiencies in North America and this could help margins in the near term. Over the longer term, we expect margins to be driven by greater service intensity for land based services as well as higher deepwater activity in the U.S. Gulf of Mexico. We expect margins to rise to about 26% by the the end of the Trefis forecast period. In the event that pricing pressures persist and margins actually decline to about 23%, this would reduce our price estimate for the stock by around 10%. On the other hand, if margins improve to about 30%, this would result in a 10% upside to our price estimate ${trefisprice}

Revenue per Rig: The revenue per rig for Halliburton in North America has steadily increased from $4.66 million in 2010 to about $8 million in 2014, owing to a steady increase in unconventional focused activity and higher service intensity for each well drilled. We expect this figure to grow by around 4-5% in the long term, reaching about $11.50 million per rig by the end of the Trefis forecast period. A multitude of factors contribute to this trend including the increasing shift towards the exploration of unconventional sources requiring complex technology and the escalation in logistical and technical complexity of explorations in remote locations and deepwater finds. If the forecast revenue figure rises to around $14 million per rig by the end of the Trefis forecast period, then it would result in a 13% upside to our price estimate for ${trefisprice}. On the other hand, there could a downside of around 10% to ${trefisprice} if the Revenue per Rig increases to just about $8 million per rig.

For additional details, select a driver above or select a division from the interactive Trefis split for Halliburton at the top of the page.

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Halliburton provides upstream drilling and exploration services to oil and gas production activities required by firms such as Exxon Mobil and National Oil Companies (NOCs) like Saudi Aramco to explore, develop and service their oil resources. The company has an extensive geographical coverage, conducting business in approximately 80 countries and provides products and services for oil and gas exploration, drilling and post-drilling services. In November 2014, Halliburton announced that it would be acquiring smaller rival Baker Hughes in a stock and cash transaction. The deal is expected to close during the second half of 2015, subject to the approval of shareholders from both companies and regulators.

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We believe the North America division of Halliburton is more valuable than the other geographical divisions primarily because of

The large market for exploration and production services in North America

North America accounts for approximately 60% of the total rig count published by Baker Hughes. While the Revenue per Rig is the lowest in this region, the size of the market in terms of the number of rigs exceeds the combined size of the other three geographic divisions of Latin America, Europe / CIS / Africa and the Middle East / Asia. Production growth in North America has been strong over the past few years, and the momentum could continue with production from the U.S. expected to rise by 600,000 barrels a day in 2015 to 9.3 million b/d and by 200,000 b/d to 9.5 million b/d in 2016 according to the U.S. Energy Department.

The push towards unconventional sources

The strong push towards exploiting unconventional sources of hydrocarbons such as shale gas, tar sands and heavy oil in North America increases the potential for additional revenues to Halliburton as exploration for these sources requires complex technology and more intensive processes. The shift has also increased the service intensity of the rigs in North America that should result in higher Revenue per Rig in the region. As of December 31, 2013, tight oil plays accounted for 28% of all U.S. crude oil and lease condensate proved reserves. Shale gas accounted for over 45% of proved reserves of U.S. natural gas at the end of 2013.

Gulf of Mexico Provides A Long Term Growth Opportunity

A large portion of the Gulf of Mexico still remains under tapped and could hold a total of around 48 billion barrels of oil compared to the 13 billion barrels of reserves estimated for onshore as well as coastal oilfields.Since much of these untapped resources are located in deep and ultra-deep waters, they will call for a high level of technological expertise as well as a higher service intensity translating into more activity for oilfield services companies.

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Exploration of deepwater and other remote sources of oil and gas

Increasingly over the past few years, major oil and gas finds have been in deepwater and other remote locations such as the CIS and Iraq. The exploitation of these sources adds tremendous logistical and technical complexity to the exploration projects that translate into revenues for upstream products and services firms such as Halliburton.

The marginal reduction in the number and size of new finds

The IEA estimates that non-OPEC oil production peaked in 2010. This means that future oil and gas finds will get increasingly rarer and the size of the discoveries will decline which will lead to higher exploration and drilling costs to maintain historical outputs of oil.

The oversupply of natural gas in North America

Natural gas prices continue to remain suppressed because of the perceived high storage levels and the oversupply of gas in the market. The lagging demand will translate into lower investments in natural gas exploration in the short term.

New oil and gas discoveries in Brazil and other Latin American countries

7 of the 10 largest oil and gas discoveries of 2008 occurred in Latin America including several multi-billion barrel offshore finds in Brazil. These discoveries are attracting investments from local oil companies such as Petrobas as well as foreign oil majors such as Chevron and Petrochina. Exploration in this region is expected to improve Halliburton's revenue and profit outlook in the region

Exploration for unconventional sources in Europe, Latin America, the Middle East and Asia

Exploration for unconventional sources such as shale and tight gas are expected to pick up in Argentina, Mexico, Poland, China and Saudi Arabia over the 1-5 years resulting in higher revenues and operating profits for Halliburton in these regions.

Industry consolidation and higher service intensity in North America

The recent downturn has resulted in the consolidation of the upstream products and services industry in North America as many smaller players failed to survive the competitive pricing by established players such as Halliburton. In addition to this, the shift towards unconventional activity and higher services intensity (higher stage counts, sand volumes) favors larger players which should result in better pricing for Halliburton.

Efforts to arrest decline rates in ageing fields

Oil firms are investing in technology to help them reduce the decline rates seen in major fields over their lifetime. Pemex has been engaged in efforts to arrest the decline in its Canterall fields while Saudi Aramco has also made it a priority to reduce the decline in its fields at 2-3% per annum.

Shift towards fully integrated offerings

Halliburton has been veering towards offering more fully integrated offerings, which include an entire suite of services for integrated well construction and intervention. Among its competitors only Schlumberger has a comparable offering, giving Halliburton an edge in this area.

Trefis Forecast Rationale for Annual Average Rig Count in North America

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The ${forecast} is the annual average of the weekly count of the number of operational rigs in the region.

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Global oil and gas exploration, and hence the rig count, is largely driven by oil and gas prices. The rig count stood at 1,894 in 2010. In 2011, the rig count in North America increased to around 2,300 rigs due to rising natural gas directed drilling. In 2012, the rig count declined slightly to around 2,283 rigs on the back of lower land-based drilling for natural gas and the continued improvements in efficiency of drilling rigs, which cut down cycles times to drill wells. The number stood at 2114 and 2241 units in 2013 and 2014 respectively. We expect the Annual Average Rig Count in North America to decline to levels of under 1850 in 2015 as tight oil drilling is scaled back amid weak crude oil prices. However, we expect a rebound going into 2016, with the number growing to around 2300 by the end of the forecast period.

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Trefis considered the following factors for its forecast:

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North America is an unconventionals focused market

Unconventional resources refer to hydrocarbon sources that are generally not extracted because of the physical and technical challenges associated with extraction and processing. Unconventional sources include gas shales, tight gas, coal bed methane, tar sands, heavy oils and methane hydrates.

As sources of conventional hydrocarbons become more scarce to find and as extraction technology improves, unconventional sources will increasingly become viable sources of hydrocarbons.

Unconventional plays often see their production peak off quickly, with flow rates from shale gas wells typically declining by over 50% in the first year, while declines for oil wells can fall by over 70%. This requires operators to keep drilling in order to keep their production output.

As oil prices stabilize over the long term, efforts to increase the extraction from tight oil and oil sands should gain traction improving the North American rig count.

Increasing significance of exploration and production

The IEA forecasts investments of around $450 billion/annum in upstream exploration through 2030 for supply to meet growth in demand

It is estimated that approximately 50% of the conventional oil production needed by 2020 is yet to be developed or discovered. By 2035 this figure is expected to increase to 70%, indicating tremendous upside potential for exploration products and the services industry which in turn will boost the rig count.

The IEA forecasts that the United States could become the world's largest oil producer, overtaking Saudi Arabia by the end of the decade. This could boost the rig count in the region.

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Rising rig efficiency will reduce rig count

Newer generation drilling rigs and pad-based drilling are allowing oil and gas companies to bring down the drilling cycle time and drill more number of wells using the same number of rigs.

For instance, in the Eagle Ford Shale, Chesapeake Energy, a leading driller has seen its spud-to-spud cycle time drop from around 21 days in 2012 to about 16 in 2013. Many other operators are seeing similar efficiency gains across basins.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.

We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

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